Friday, April 05, 2013

Central Bank asset purchases

The Bank of Japan has been doing this for a better part of a decade, with little effect.  I say little because the net effect of all these Bank Purchases and QE programs is near zero.

Its the Trade balance of Japan that is effected.  Japanese capital flows out of the country and buys ANY asset in the world with "some" yield.  This has the effect of  weakening the Yen somewhat, which is promptly netted out in all these BOJ purchase programs.  Even Polish bonds are seeing inflows.

The effects are severe and perverse, much as we see similar "asset swap" programs  in the U.S. (QE is just a nice way of saying "we are swapping low yielding assets for zero yielding ones") the effect is a temporary gain in asset prices followed by a continued deterioration in economic fundamentals.

The effects are dubious, but the risk is enormous:  the perverse effect of "fictitious demand" causing the supply of assets to decrease, with all sorts of nasty ramifications.

What price discovery is effectuated by capital markets these days?  Its a disconcerting question.

No comments: